Palliative, not a panacea

The steps like withdrawal of additional levy on Foreign Portfolio Investors (FPIs), tax hike on the super-rich and surcharge on capital gains tax and bank capitalisation would provide relief to the battered economy, help address liquidity situation and put money in the hands of the companies

AuthorPublished: 26th Aug 2019  12:00 amUpdated: 25th Aug 2019  11:42 pm

A string of fire-fighting measures announced by Finance Minister Nirmala Sitharaman will certainly alleviate the pain caused by the recent budget but cannot serve as a panacea for the economic ills. The steps like withdrawal of additional levy on Foreign Portfolio Investors (FPIs), tax hike on the super-rich and surcharge on capital gains tax and bank capitalisation would provide relief to the battered economy, help address liquidity situation and put money in the hands of the companies. However, this is not adequate for the economy that has been on a downslide leading to massive job losses. Hopefully, this is just the beginning of a process that will soon include structural reforms to put the economy on a long-term, sustainable growth path. While it is refreshing to see that the government has acknowledged the gravity of the situation by undertaking course-correction and providing the much-needed relief, there is a need for concrete follow-up in the form of structural reforms in labour, land, financial and tax administration sectors. The 1991 liberalisation process had left the financial sector unreformed. The uncompetitive finance system whose growth depends on taxpayer bailouts needs to be replaced with a more robust and flexible set-up that is in sync with changing realities. While increasing liquidity, lowering interest rates and recapitalising public sector banks can ease immediate difficulties and help spur credit growth, the financial sector cannot become dynamic and competitive without legislative and regulatory reform. The Finance Minister has done well to correct her own budgetary mistakes. Now, she needs to correct the mistakes of her predecessors.

It is quite obvious that the exit of FPIs from Indian stock market and the fall in the market rang alarm bells in the power corridors. It is good news that the government listened to the markets and rolled back the tax. This should be the first step towards an examination of the tax system in India. With its high rates, several exemptions and poor compliance, the present tax system and the way it is administered act more as a hindrance to growth and needs to be reformed. The move to frontload capital injections for state-run banks will help spur fresh loans, provided the banks pass on all rate cuts to borrowers by benchmarking their loan products to the Reserve Bank of India’s benchmark rate. In order to put the economy on a higher growth path, the government needs to take the bold step of ending the continuous drain on its resources caused by the perennially loss-making PSUs. Disinvestment or privatisation of public sector enterprises will lead to better allotment of resources in the economy. It is time the government exit the activities like running hotels, airlines, telecom and steel companies.

Now you can get handpicked stories from Telangana Today on WhatsApp / Telegram everyday. Click these links to subscribe and save this number 9182563636 on your contacts.

Click to follow Telangana Today Facebook page and Twitter